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Anxiety lingers over fate of naira as speculators exploit CBN low funding

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Anxiety lingers over fate of naira as speculators exploit CBN low funding

Developments across market segments are raising anxiety over sustainability of recent trading weeks of consistent gains by the naira, which left many currency speculators in the loss region.

Investigations revealed that the steady reversal in the fortunes of the naira was triggered by a combination of factors, including sharp practices encouraged by the lower exchange rate in the parallel market.

Since the Central Bank of Nigeria (CBN) resumed dollar sales to Bureaux De Change (BDCs), the parallel market exchange rate had been below that of the official market. For example, on Friday, April 19, the parallel market rate at N1,120 per dollar was N64.5 lower than the official rate of N1,234.49 per dollar.

To exploit this gap, banks besieged the parallel market, buying dollars at the cheaper rate and reselling to their customers at the higher official exchange rate.

Following the steps of the banks, some forex end-users also bought dollars in the parallel market, deposited them in their domiciliary account and sold to the banks at a higher official rate.

This practice, according to currency dealers, triggered huge demand for dollars in the parallel market and hence the 25 per cent depreciation of the naira in four days last week.

Currency dealers also cited the slow pace of dollar disbursement to BDCs by the CBN. They noted that dollar disbursement to BDCs comes in trickles, with some BDCs not getting dollars for more than two weeks after naira payment to the apex bank.

The naira on Friday exchanged flat at N1,380 as dollar scarcity hit at the parallel market, also known as black market. Some traders sold one dollar at the rate of N1,410 and N1,280 in various areas across the country on Friday, amid increased demand, findings showed.

According to data from the FMDQ Securities Exchange Limited, the naira also closed flat at the Nigerian Autonomous Foreign Exchange Market (NAFEM) as the dollar was quoted at N1,402.67 on Thursday compared to N1,390.96 closed on Tuesday before the workers’ holiday.

The NAFEM window witnessed notable shifts in currency values. On Thursday, the intra day high closed at N1,445, reflecting a slight decline from Tuesday’s figure of N1,450. Meanwhile, the intraday low experienced a more significant drop, falling from N1,200 on Tuesday to N1,299 on Thursday.

The pressure on the naira has persisted despite various measures put in place by the Central Bank of Nigeria (CBN) to boost liquidity in the foreign exchange (FX) market.

Consistent gains in April saw the naira emerge as the best-performing currency globally, supported by bullish sentiment from leading international investment institutions.

“Our FX market is experiencing robust activities, with turnover reaching levels not seen in over seven years. This liquidity boost instills confidence among investors, businesses, and other partners, ensuring fluidity in their interactions with Nigeria’s FX markets,” Olayemi Cardoso, governor of the CBN said last month.

According to Dr. Muda Yusuf, CEO of the Promotion of Private Enterprise, “it might even be that we cannot afford to leave the currency floating, especially given the imperfections that we have in the economy.”

President of Association of Bureaux De Change Operators of Nigeria (ABCON), Dr. Aminu Gwadabe, said: “The depreciation of the dollar was caused by two factors. The first was that people were buying from the open (parallel) market, depositing the dollars in their domiciliary accounts and selling in the interbank market and this is because the open (parallel) market rate is always lower than the interbank market rate.

“The second factor is that we have seen the resurgence of Person-to-Person, P2P, where hedging, margin trading are taking place.

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“After nipping in the bud of Binance, other platforms sprang up. And you know transactions in those platforms are purely speculative. The likes of Binance can only be profitable at the expense of naira depreciation because it is a market that you buy low and sell higher.”

On Monday April 22, the Central Bank of Nigeria approved the allocation of $15.83 million to 1,583 BDC operators. The move was aimed at enhancing liquidity in the unofficial market.

The CBN in a letter to BDCs announced the allocation of $10,000 to operators across the country. The allocation comes at a rate of N1,021 per US dollar, aimed at stabilsing the foreign exchange market and ensuring accessibility of foreign currency to eligible end users.

According to a letter released by the CBN to the Association of Bureau De Change Operators of Nigeria, all eligible BDCs are directed to initiate payments of the Naira deposit to specified CBN Naira Deposit Account Numbers starting from Monday, April 22, 2024. Upon submission of confirmation of payment and necessary documentation, the CBN will disburse foreign exchange at the respective CBN branches.

Investigation also revealed the situation was aggravated by the absence of CBN intervention in the official market for some weeks while inflow from Foreign Portfolios, and FPIs also dwindled.

Explaining this development, Nnamdi Nwizu, Co-Founder of Comercio Partners, a Lagos-based investment bank, said: “Until yesterday when they intervened, CBN had not intervened in the interbank market for weeks, and inflows were drying up.

“Also forex demand that waited for naira to strengthen seems to be filtering through now, both local and FPI’s.”

On the outlook for the naira in the coming weeks, Nnamdi said: “A lot depends on if the CBN continues to intervene in the market to ensure that they don’t lose control of the market. And also if we start to see renewed FPI flows.”

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